Ethics and tax planning: in the end, tax planners must be comfortable explaining to taxpayers how they report transactions.

• Position: Discussion

Tax planning and ethics. For some corporate tax practitioners, the combination is not exactly like the perfect martini, but more like the perfect storm. However, like it or not, both are extremely important when advising clients about tax issues. For this roundtable, we convened a group with a world of experience dealing with these issues, in academics and in practice, including Peter Barnes, of counsel to Caplin & Drysdale, Chartered, and a senior fellow at Duke University, Duke Center for International Development; Linda Galler, professor of law at the Maurice A. Deane School of Law at Hofstra University; and Paul Oosterhuis, of counsel at Skadden, Arps. The discussion was moderated by Senior Editor Michael Levin-Epstein.

Michael Levin-Epstein: When you think of tax planning and ethics, what's the first thing that comes to your mind?

Peter Barnes: When you talk about tax planning and ethics, the key issue I believe is that the tax planner must be comfortable explaining what they have done and how they are reporting a transaction to both or all of the tax jurisdictions that are affected by the matter. I'm a big believer that if the tax planner is comfortable saying, "Here's what I did, and here's why I did it," that you are going to get an answer that's fair to the taxpayer and most likely fair to the tax jurisdictions.

Paul Oosterhuis: I totally agree with the premise that you have to be able to explain a position consistently in one jurisdiction and another, and that includes if you are talking about different treatment that gives you an arbitrage, like in a repo transaction, explaining to the two jurisdictions honestly that there is just a different treatment of when a party is treated as owning stock as opposed to when is a party treated as holding the stock as collateral to a debt instrument, and that the rules differ in the two jurisdictions, and you're taking advantage of that and there's nothing wrong with that. It seems to me that is one of the first ethical premises of tax planning. Similarly, in transfer pricing, if you've got income in a low-tax jurisdiction, you need to be able to explain to high jurisdictions why it is that there's economic substance to the position you're taking that is fair to both jurisdictions.

Barnes: Paul makes a very important point: tax rules do differ around the world. Many times if you explain to a country why you are fully consistent with their rules, that's really all they want to hear. But you've got to be willing to do it in open conversation with all the parties interested in that transaction.

Oosterhuis: And of course it doesn't always work. We've had a history with repo transactions, for example, between France and the U.S. where both sides have decided that maybe the settled law in their jurisdiction shouldn't apply when the other jurisdiction has different treatment. In other words, the fact that the other jurisdiction has a different view should alter the law in the home jurisdiction, which to a lawyer doesn't make any sense unless there is a statute or some other provision that builds that into the law. But we've certainly seen tax authorities take that view, and that can give taxpayers problems, which just opens up the whole area of, these days in particular, the tax law is not about identifying rules and following them solely. It's also about what tax authorities are inclined to do and positions they're inclined to take that may or may not be well justified by their own laws.

Levin-Epstein: Is there anything different between planning for taxes and planning for other corporate costs, like wages and materials and transportation?

Barnes: The only difference I see is that with respect to taxes and multinational companies, you are very frequently going to have two countries that have an interest, whereas many of the other kinds of expenses for which you plan you have only one country involved. But to me, in each of those instances--environmental laws, labor laws, your relationships with suppliers--you have to be totally comfortable that what you're doing will withstand public scrutiny, because there will be public scrutiny. But beyond that, I think the notion that somehow taxes just are what they are, and that there should not be any focus on structuring in order to be tax-prudent, is a silly notion. You don't just hire people and pay them whatever they want...